Abstract:
BACKGROUND : This article is based on a PhD study in which a microsimulation (MS) tax model
was constructed to measure the revenue and tax efficiency effects of adjustments to marginal
tax rates on individual income.
AIM : The main aim with this analysis is to determine the advantages of adjustments to the
thresholds and taxable income brackets in SA on revenue collected, tax efficiency, and
progressivity as part of a broader tax reform effort.
SETTING : Currently such changes mainly consist of adjustments to tax brackets and thresholds
to account for inflation, although since the 2017/2018 budget, such adjustments have been
minimised as a result of the widening in the budget deficit.
METHODS : The tax brackets and thresholds for the 2005/2006 fiscal year are used as a base from
which changes are implemented. Besides the base scenario, two other scenarios are simulated,
based on that of South Africa’s peers (lower levels). Simulations are done with the MS tax
model.
RESULTS : The research shows that instead of only allowing for inflation adjustments, the
alignment of income brackets and thresholds to levels closer to those of South Africa’s peers
could be beneficial with an improvement in the efficiency of the income tax regime. More
individuals could be included into the tax net, albeit at (on average) lower tax scales resulting
in a marginal loss in revenue. Although such an adjustment could be interpreted as being more regressive and, therefore, negative from a ‘tax fairness’ perspective, the Personal Income Tax
(PIT) burden expressed as the PIT and Gross Domestic Product (GDP) ratio would be slightly
lower.
CONCLUSION : The possible result would be an improvement in tax liability and economic
growth which could in turn fuel personal income and, therefore, revenue collected from this
important tax source. This would compensate for the initial loss in PIT.
